Covered Bonds

The UK's Prudential Regulatory Authority’s stress tests of its eight major banks and building societies has not spooked covered bond investors, despite the near failures of Royal Bank of Scotland and Lloyds.

Obligations Fonciéres issued by Compagnie de Financement Foncier and CIF Euromortgage were downgraded one notch by Fitch this week following the rating agency’s downgrade of France’s long term rating to AA from AA+.

Obligations Fonciére issued by Compagnie de Financement Fonciere and CIF Euromortage were downgraded one notch by Fitch this week following the rating agency’s downgrade of France’s long term rating to AA from AA+.

The Bank of England’s stress tests of its eight major banks and building societies has not spooked covered bond investors, despite the near failures of Royal Bank of Scotland and Lloyds.

The outlook for covered bond primary markets is likely to be less clear cut in January 2015 than it was a year earlier, as uncertainty over the timing of a sovereign quantitative easing (QE) programme, the trajectory of US rate rises and an ambiguous political backdrop are likely to complicate price discovery. But with a few more basis points on the table, tier one issuers shouldn’t have difficulty attracting investors.

The International Monetary Fund’s recommendation that Danish banks reduce reliance on short-term funding and limit lending on variable rate, as well as interest-only mortgage loans, is credit positive for Denmark’s credit institutions, said Moody’s on Monday.

The European Central Bank is legally obliged to carry out its role as a single supervisor and its responsibility to apply resolution measures will take precedence over its position as a covered bond investor, say analysts at Barclays research. As the central bank has the power to make decisions that could be detrimental to covered bond holders, covered bond supervision should be strengthened.

Issuance of benchmark Pfandbriefe is expected to increase slightly next year, but with private placements set to decline more sharply, the overall size of the German covered bond market will shrink, said the German Association of Pfandbriefbanks (VDP).

A lower than expected take up of the Targeted Long Term Refinancing Operation is positive for covered bond supply and should also lead to an expansion in covered bond demand, as the rising probability of a sovereign quantitative easing (QE) programme and resulting sovereign rally improves relative value.

The absence last week of primary issuance meant that the European Central Bank had to increase its purchases of covered bonds in the secondary, but its buying barely had any impact on the market which remains offered as cornerstone investors like MEAG switch into sovereign bonds.

Allen Rad has joined Crédit Agricole CIB as head of European financials and covered bond trading. He most recently worked at Royal Bank of Scotland.

Up to 10% of covered bonds backed by commercial real estate could see ratings drop by up to three notches, as a result of Standard & Poor's proposal for evaluating commercial real estate mortgages, which was released as a request for comment on Thursday. The announcement follows S&P’s new criteria for covered bond ratings, published on Tuesday, which will result in changes to 25% of all covered bond ratings.